Having a background in sociology, philosophy, and economics, I'm going to try to give this blog a pretty broad scope. Going from finance and economics, to geopolitics and world news, to the occasional academic or theoretical post.
I was born in Buenos Aires, Argentina and live in New York, so we'll try to add that into it as well.
Even though I like Adam Smith, don't be surprised if a little Marx makes its way in there as well.
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Talk of a Greek Eurozone exit is back on the table as Athens awoke Tuesday paralyzed by a 48-hour strike called by the country’s two largest labor unions. With the Administration of Antonis Samaras struggling to pass further austerity cuts needed to secure the next tranche of bailout money, and with Athens negotiating a two-year extension to the tough bailout targets imposed by the Troika, political risk is once again threatening the relative tranquility that has blanketed Europe for the past couple of months. Given the Eurozone’s size and global interconnectedness, any major setback may well translate into a huge blow to the global economy.

Don’t ignore Europe. While the world’s eyes are focused on the U.S. Presidential election, The Old Continent is still mired in a sovereign debt crisis and a deep recession that will take years to fix. And Tuesday’s strike brought all of that back to the fore.

Athens has been negotiating with the International Monetary Fund (IMF), the European Central Bank (ECB), and the European Commission (collectively the Troika) for months to extend the bailout targets, and it’s time for Prime Minister Samaras to deliver. Voting on a series of measures is scheduled for Wednesday, and these will include extending the retirement age by two years to 67, cutting pensions as much as a quarter, eliminating holiday bonuses, and easing restrictions to facilitate the firing of civil servants and liberalize labor markets.

Passing the new austerity plans, which should save Athens about €13.5 billion ($17.3 billion) according to Der Spiegel, should guarantee Greece the timely release of the next €31 billion ($38.7 billion) tranche of aid. As about 16,000 protesters congregated at Syntagma Square, policymakers crunched the numbers to see if Samaras had enough support.

There was speculation that a minor member of the ruling coalition, the Democratic Left, would vote against the motion, taking its 16 members of parliament and leaving Samaras with a thin 158-person majority (150 is the cut-off number). Early on Tuesday, though, Trade the News reported the Democratic Left was on board; Samaras should have at least 174 MPs on his side in order to combat leftist coalition Syriza, headed by Alexis Tsipras, in Parliament.

Regardless, Greece’s major cities were paralyzed. Subways, buses, trolleys, trams, and trains were shut down in Athens, according to Spanish daily El Pais, while port and airport workers adhered to the strike. A failure to pass the latest round of austerity could lead to a scenario in which Greece effectively runs out of money and goes into default. This in turn could lead to a breakup of the currency union, a theme that has flown under the radar for months now.

In late July, ECB chief Mario Draghi had a stroke of genius, verbally intervening markets by affirming that the euro was irreversible. Since then, Draghi unveiled an open-ended bond-buying program that required nations to request a bailout in exchange for strict conditionality. Peripheral debt yields fell dramatically while European stock markets surged. ETFs for German, Spanish, and Italian equities are up more than 23% since late June, while Greek stocks have surged more than 50% in that time. Major European banks like Banco Santander, Deutsche Bank, Credit Suisse, and Barclays rallied between 20% and 30% since.

If Samaras fails to deliver the cuts, or if the Troika resists Athens’ calls for a two-year target extension, Greece could be pushed to the edge of the Eurozone. According to Nomura’s currency expert Jens Nordvig, there is no historical precedent for the breakup of such a large currency union, with the Eurozone accounting for about 20% of global GDP and 35% of global bank assets. With the euro seen as a reserve currency that’s widely used in international capital markets, and about €30 trillion ($38.4 trillion) in euro-denominated contracts in existence outside of the jurisdiction of individual Eurozone countries, Nordvig argues the effect of a breakup could be massive.

While actually quantifying the impact on global output of a so-called Grexit may be nothing more than a Byzantine discussion given the complexity of the matter, the fact that the issue is back on the table should be troubling. With market participants focused on the U.S. Presidential election and the leadership change in China, the European sovereign debt crisis may be going unnoticed for the time being. But given its size and global interconnectedness, any major event in Europe may very well deliver a massive blow to the global economy.

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“Samaras should have at least 174 MPs on his side in order to combat ultra-nationalists Syriza, headed by Alexis Tsipras, in Parliament.”

Ummm. Syriza, the major opposition, is a left social-democratic coalition, not ultra-nationalist. You guys must be thinking of the Fascist “Golden Dawn”.

I think Forbes needs to do its research better, and maybe hire an editor or two … unless you don’t care about the parties that are (at least on paper) anti-austerity and outside the ruling coalition. Typical.

You’re right, that was sloppy. I will correct it, and yes, I did confuse the two in my head. I’ve covered Greece quite a lot through the duration of this crisis and I clearly shouldn’t have made that mistake. thanks for pointing it out.

This whole mess is the result of 100-150 year old economic theories and ideas being used or applied to a badly designed monetary system in a modern economic world. Austerity is an economic response to a governence issue. It seeks to restrict spending without improving income. Most people have labeled the Greeks as lazy spendthrifts when the major problem is a culture that tends ignore governence and particularly taxes. The government needs to address those issues with the people rather than try to starve them into submission.

The decline in economic activity and rise in unemployment in Greece, Spain and Italy is helpful to no one. The Countries driving the austerity demands will probably end up suffering a greater loss of economic activity than what it would cost to bail them out. Declining economic activity will affect the EU far too severely to let it happen.

Fixing the governence problem is the absolute must. Argentina has had it’s share of economic problems over the years over and over. Without the changes to the way the country is governed, the economy of each will continue to fail.

Austerity on its own does nothing but starve a country into compliance on the spending side of the equation, but cannot stimulate growth. Seems to me that the problem of stimulating growth, which is directly tied to changing cultural perceptions so as to accept governance and taxes, takes a lot longer to fix. It’s necessary, though, in order to create a sustainable economy in the future.

On Argentina, while there are many common themes (overindebtedness, fixed currency, loss of competitiveness, etc), the major difference is that Argentina counts with a major productive sector that consistently brings in a lot of money: it’s agricultural sector. This allowed Argentina to finance itself, to a certain extent, while it found its footing. Greece doesn’t have that luxury, at least not to the same extent.